Appendix I. Methodology
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We are grateful to Steve Barnett, Olivier Blanchard, Nigel Chalk, Stanislaw Gomulka, Papa N’Diaye, Nathan Porter, Lukasz Rachel, Markus Rodlauer and participants in the ECB workshop ‘China—Transitioning Towards a Sustainable Economy’ for comments, to Sung Eun Jung for excellent research assistance.
Barnett and N’Diaye (2013) find a more negative output gap using a different measure of capacity utilization—a result that underscores uncertainty surrounding estimates of this key variable.
See Box 5 in IMF Country Report No. 14/235 for additional evidence.
The results are influenced by our assumptions about input shares in the production function (derived from the average share of capital and labor incomes from PWT 8.0 data), which show a share of labor compensation in income in China of around one half. Applying more standard input shares in the production function produces a higher TFP contribution, but still indicates a falling trend in the post-2009 period.
CF also has a version of fixed-length symmetric filter, but the moving average weights are different due to different objective function when select the weights.
Adding the housing price gap as a regressor in the ‘finance-neutral’ output gap equation significantly widens posterior densities of the coefficients, which is likely due to colinearity between credit and housing price gaps.